Chapter 25 · Trend Analysis
Trend analysis
A trend is a sequence of highs and lows, not a slope — how to define the swings, draw the line, measure strength and recognise the end.
Higher highs, higher lows, and the break
Almost everyone describes a trend as a direction. That is not usable, because it cannot be falsified. A trend is a sequence, and a sequence has a definition you can test against the chart:
| Condition | Definition | Ends when |
|---|---|---|
| Uptrend | Each swing high above the last, each swing low above the last | A swing low forms below the previous swing low |
| Downtrend | Each swing high below the last, each swing low below the last | A swing high forms above the previous swing high |
| Range | Highs and lows without a consistent direction | Price closes outside the range and holds |
First, define a swing point
The sequence above is meaningless until you say what counts as a high. The standard mechanical definition: a swing high is a bar whose high is greater than the highs of the n bars either side of it. With n = 2, a bar must be higher than the two bars before and the two after.
- n = 2 gives many swing points and a jumpy, sensitive trend reading.
- n = 5 gives fewer, larger swings and a slower one.
- The choice is not cosmetic — it decides when your trend is broken. Pick n from your holding period and write it down, or you will unconsciously choose whichever value agrees with the position you already hold.
- A swing point is only confirmed n bars *after* it forms. There is no way around that lag; it is the price of an objective definition.
Drawing a trendline
- In an uptrend, connect the rising lows. In a downtrend, connect the falling highs. Drawing through the wrong side is the most common error.
- Two points define the line; the third touch is what confirms it. A line through two points is a line through any two points.
- Treat it as a zone, as with support and resistance. A break of a few paisa is not a break.
- For moves spanning years or several hundred percent, use a log scale. On a linear scale a constant percentage rise curves upward, and every long-term trendline looks broken when it is not.
Channels, and what they measure
Draw the trendline through the lows, then a parallel line touching the highs. Price inside the channel is a normal trend; price accelerating out through the top is often the last, fastest part of a move rather than the start of a better one.
Worked: momentum fading before the break
A share advances in three legs, with pullbacks between them:
| Leg | From | To | Gain | Days |
|---|---|---|---|---|
| 1 | Rs 318 | Rs 380 | Rs 62 | 14 |
| 2 | Rs 352 | Rs 400 | Rs 48 | 17 |
| 3 | Rs 376 | Rs 406 | Rs 30 | 21 |
- The highs are still rising — 380, 400, 406 — so by the strict definition the uptrend is intact.
- But each leg gains less and takes longer: Rs 4.4 a day, then Rs 2.8, then Rs 1.4.
- The trend is not broken; it is tiring. That is a reason to tighten a stop or stop adding, not a reason to sell short.
- The actual break comes later, when a pullback ends below Rs 376 — the previous swing low.
Measuring how strong a trend is
| Measure | Formula or method | Reading |
|---|---|---|
| ADX | Wilder average of DX (see Advanced Indicators) | Below 20 no trend; above 25 a trend; above 40 strong |
| Price vs 200-day average | Close ÷ SMA(200) | Persistently above 1.0 is a primary uptrend |
| Slope of the 50-day average | Change in SMA(50) over n days | Direction without the daily noise |
| Percentage of pullback | Retracement ÷ previous leg | Shallow pullbacks suggest a strong trend |
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